Plains All American Pipeline, L.P. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. Plains transports, stores, terminals and markets crude oil, refined products and LPG, and also operates natural gas storage through its majority-owned subsidiary, PNG. Financial amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $7,694 | $6,125 |
| Operating income | $285 | $211 |
| Net income | $185 | $151 |
| Net income attributable to Plains | $182 | $151 |
| Basic and diluted earnings per limited partner unit | $0.90 | $0.80 |
| Adjusted EBITDA (non-GAAP) | $348 | $272 |
| Implied distributable cash flow (non-GAAP) | $241 | $201 |
| Cash provided by operating activities | $654 | $391 |
- Revenue increased 26%, driven largely by higher commodity prices and Supply & Logistics activity. Management cautions that revenue growth is not itself a primary measure of that segment’s profitability.
- Segment profit rose to $348 from $279: Transportation $137 (up 8%), Facilities $78 (up 32%), and Supply & Logistics $133 (up 43%). Supply & Logistics profit per barrel increased to $1.65 from $1.27; Transportation was $0.51 in both periods and Facilities rose to $0.34 from $0.30.
- Adjusted EBITDA and implied DCF are management-defined non-GAAP measures. Adjusted EBITDA excludes selected comparability items, including the $23 early-debt-redemption loss; implied DCF also reflects maintenance capital, taxes and other adjustments.
- Operating cash flow benefited from working-capital movements, including a reduction in inventory, particularly LPG. Investing cash outflow was $842, including $756 for acquisitions; capital expenditures were $890, including $769 acquisition capital, $97 growth projects and $24 maintenance capital.
- At March 31, cash was $19, working capital surplus was approximately $556, and reported available liquidity was approximately $2.2 billion. Total debt was $5,450, down from $5,957 at December 31, 2010. Management reported compliance with debt covenants.
- Quarter-end current assets were $4,607 and current liabilities $4,051. Senior notes, net, were $4,760; short-term debt was $474 and long-term debt under facilities and other was $216.
Material changes and capital actions
- PNG acquired SG Resources, owner of the Southern Pines natural gas storage facility, for approximately $752 net of cash acquired. The facility is permitted for 40 Bcf of working-gas capacity. Purchase-price allocation, including $301 of preliminary goodwill, remained subject to finalization.
- PNG issued units to third parties for approximately $370 net proceeds and Plains bought additional PNG units; Plains’ ownership in PNG declined from approximately 77% to 64%.
- Plains issued $600 of 5.00% senior notes due 2021 and completed a common-unit offering that generated approximately $503 net proceeds. It also redeemed $200 of 7.75% notes due 2012, recording a $23 loss. These transactions contributed to lower revolving and inventory-facility borrowings; total debt nevertheless reflects the overall financing and acquisition activity.
- Common units outstanding were approximately 149.1 million at May 2, 2011, compared with 141.2 million at December 31, 2010. The May 2011 distribution was declared at $0.97 per unit, a reported 3.7% year-over-year increase.
- Management forecast 2011 capital expenditures of approximately $690, excluding acquisitions: $600 for internal growth projects and $90 for maintenance.
Outlook, risks and unusual items
- Management attributed improved results to favorable lease-gathering volumes and margins, crude-oil quality differentials and market structure; higher transportation volumes, tariffs and Canadian-dollar translation; and asset expansions and acquisitions. It expects Canadian income-tax expense to be higher for the remainder of 2011 than in 2010 following tax-law changes and a restructuring of Canadian operations.
- No full-year earnings guidance is provided in the supplied filing text. Management states that operating results for the quarter should not be taken as indicative of full-year results.
- In late April 2011, after quarter-end, a high-volume crude-oil release occurred on the Rainbow Pipeline in Alberta. The preliminary estimate of total costs, including lost revenue, was approximately $25; some costs were expected to be insured. The estimate could change.
- Environmental reserves were approximately $67 at March 31. Plains warns that remediation costs may exceed reserves and that insurance may not cover all operational risks; it elected to self-insure hurricane/windstorm property-damage risk for 2011/12.
- Other disclosed matters include SemCrude-related claims, disputes over remediation and indemnity at a New Jersey terminal, and an EPA consent decree filed in May 2011 proposing a $2.5 penalty and an environmental project estimated at $0.2, subject to court approval. Management did not expect the legal matters, individually or in aggregate, to materially adversely affect the business.
- Derivative positions are used for risk management, but fair values and hedge results can fluctuate. A net loss of $156 was deferred in accumulated other comprehensive income at quarter-end; approximately $164 of net loss was expected to be reclassified to earnings over the next 12 months, with actual amounts dependent on market conditions and generally associated with underlying hedged transactions.
- Management cited exposure to commodity-market structure and volatility, counterparty credit, access to capital, acquired-asset integration, pipeline integrity and environmental events, insurance availability, regulation, weather and Canadian-dollar movements.
Investor verification priorities
- Track the final Southern Pines purchase-price allocation, acquisition performance and integration, including the facility’s contribution to Facilities segment results.
- Monitor Rainbow Pipeline cleanup, final costs, insurance recoveries and any operational or regulatory consequences.
- Reconcile operating cash flow and DCF to working-capital and inventory movements, and compare planned growth and maintenance capital with actual spending.
- Review debt maturities, facility availability, covenant headroom and the effect of equity issuance and distributions on per-unit cash generation.
- Assess the continuing effect of Canadian tax changes and the timing and earnings impact of deferred derivative losses and other hedge settlements.